Payment Systems – The Essential Next Step for UCBs in India

Growing economic activity, everyday commerce and easy accessibility has made payment systems an integral part of a country’s financial framework. Payments systems contribute to the GDP of a country by facilitating convenient and hassle-free business transactions while reducing the processing costs, meeting regulatory compliance, simplified dispute management, greater transparency in financial supply chain and opportunities to cross-sell in a highly efficient, accurate, timely, instantaneous and secured way. Retail payments in India have registered a remarkable growth of 27% in volume and 6.73% in value in the year 2014-2015.

This unavoidable potential of payments has not gone unnoticed by regulatory bodies and market giants. Approval of Payment Banks and Small Finance Banks has opened up new arenas of differentiated banking which can disrupt the existing market segmentation of the banking industry. Another tough competition is posed by Payment Service Providers (PSPs) and Telcos who are capturing the payments market through digital wallets and similar unorganized payment mechanisms. According to a study, India is expected to have 314 million mobile internet users by 2017. Smartphones are looked upon as an emerging, hassle-free banking channel. Technology is leveraged to build smarter systems to touch pain areas of banks like Know Your Customer (KYC), seamless channel integration and overall reach to the end customers. By far, UCBs have been at the bottom of the banking pyramid serving the masses of the rural areas. However, in this current wave of revolutionary changes in Indian banking scenario, UCBs will have to sustain, develop, compete, promote and innovate to stand strong against the wind.

In the existing market segmentation of bank customers, metropolitan cities and developed urban areas majorly fall under the purview of public sector and private sector banks. Foreign banks also have significant amount of market share. On the other hand, cooperative banks and especially UCBs have been taking care of the needs of middle and low income groups. Introduction of Payment Banks and Small Finance Banks can bring alteration to this segmentation and pose a tough competition for UCBs through their network of Business Correspondents (BC), other networking sources and widespread use of technology. While the goal is the same of Financial Inclusion, the methods applied would be different. The UCBs need to gear up – first, by having a sound core banking system; second, by participating in the National Financial Switch (NFS) network of ATMs through NPCI and third, by developing alternative channels of banking like mobile, internet, USSD, Aadhar etc through IMPS. This will not just help in sustaining their existing customers but also attract new set of customers who are looking out for smart and convenient services like those provided by other types of banks.

By interfacing with the National Financial Switch (NFS) of NPCI, the UCBs get an access to host their customers through a network of 2,15,000+ ATMs across the country in a cost-effective manner. RuPay is the domestic brand of cards which can be issued by the banks at reasonable eligibility criteria. Recently, NPCI has also announced the facility to issue credit cards in addition to the existing debit card scheme. RuPay cards can help in customer education and propagate a gradual shift from cash to plastic money as these cards can be used at ATMs, POS and e-commerce platforms. It is worth mentioning the impact of e-commerce on payments. With large number of businesses going online, e-commerce is indispensable for all groups of customers and UCBs need to be prepared for it. In addition to this, RuPay can act as a competition against international card schemes, enable customized products for domestic audience and ensure that payment information lies within the country’s infrastructure.

Nothing can be more attractive than a service which is 24x7x365 for a customer. Immediate Payment System (IMPS) is an interbank electronic payments mechanism that enables customers to use mobile instruments, internet banking and ATMs as channels for accessing their bank accounts and placing fund transfer in a secured manner. Currently, IMPS facilitates transactions like are P2P (Person to Person), P2A (Person to Account), P2M (Person to Merchant), M2P (Person to Merchant) & P2U (Person to UID).

As per a study from Cisco, India is the third largest smartphone market globally and is expected to have 651 million smartphone users by 2019. While according to US based firm – VNI (Visual Networking Index) forecast, the number of tablets will be 18 million by 2019. Decreasing prices of the devices, ease of use, advent of 3G and 4G services and competitive data tariff plans have given a boost to smartphone market and mobile internet penetration in the rural areas as well. A report by IAMAI and KPMG says that while 3G and 4G will remain an urban phenomenon, 2G will remain in limelight for rural growth. The report has also projected that India will reach 236 million mobile internet users by 2016, and 314 million by 2017. While channels like mobile and internet can be used for smartphone users, USSD and SMS channels of IMPS can serve feature phone users effectively. This opens up another facet for UCBs which they should tap.

Aadhaar Enabled Payment System (AEPS) – a bank led model is more a door-to-door banking which uses Aadhaar number and finger print to perform basic bank transactions at PoS (Micro ATM) through the Business correspondent (BC). The objective of AEPS is to empower a bank customer to perform basic bank transactions through a BC by using his Aadhaar number which is mapped to his Bank account. This will also help to achieve RBI’s goal of electronification of retail payments and Financial Inclusion. Under Aadhaar Payment Bridge System (APBS), the disbursements of Government entitlements like NREGA, Social Security pension, Handicapped Old Age Pension etc. of any Central or State Government bodies would be directly credited in Aadhaar enabled accounts of intended beneficiaries without any leakage or pilferage. UCBs being more close to the rural segment that may lack awareness about these benefits have to consider this as a powerful support to their fundamental vision of growth, development and social upliftment of rural areas.

Emerging Trends

Once the UCBs masters the above mentioned infrastructure, they are ready with a strong foundation for a host of upcoming trends in the field of Banking. As rightly quoted by Mr.Nandan Nilekani, ex-chairman of Unique Identification Authority of India (UIDAI) – ‘We are now having WhatsApp moment in financial services in India’. The rules are changing, conventional methods are fading away and the customer is getting smarter. Telcos and PSPs are now providing digital wallets to their customers. Every person with a mobile phone can be a potential BC. In such situation, UCBs will have to broaden their horizon and come up with fresh ideas of digital banking. Some new services like UPI and BBPS are in limelight for the kind of potential they hold to coalesce multiple features and entities together.

Unified Payment Interface (UPI) of NPCI aims to provide a single interface across all existing retail payments channels like IMPS, AEPS, NFS etc. Third party API integration can collect payment from a virtual address without the need to share account details or credentials on 3rd party applications or websites. This will enable banks to come up with Universal apps for payments ensuring security, use of unique identifier, opportunity to tap Customer to Business (C2B) segment and E-commerce & M-commerce (PULL initiated) transactions and all this with a simplified one-click authentication system.

Bharat Bill Payment System (BBPS) will offer interoperable bill payment service online as well as through agents. It will facilitate recurring bill payments like utilities bills, school fees, DTH, etc. under a common platform without having the need to go to different offices or different websites. In this system, NPCI will act as a Bharat Bill Payment Central Unit (BBPCU) while Banks can act as Bharat Bill Payment Operating Units (BBPOUs) accepting payments from the customers.

Any Time, Any Place, Any Device is the new mantra of future payment systems. There is a lot more scope in the technologies like Near-Field Communication (NFC), Augmented Reality, One-Touch Authentication, etc. which can bring amazing changes to the digital banking ecosystem. They are just round the corner.

It’s time for UCBs to strengthen existing competencies and explore new opportunities. They need to analyze the market, identify competition and beat them. At the same time, they have a great privilege to educate their huge customer base and in turn gain firm support for new initiatives. This can be achieved by developing a trained and skilled manpower who can communicate with customers the benefits offered and in turn educate, publicize, give assurance and make their customers comfortable using these products. UCBs need to analyze and understand how they can leverage these services through cost-effective methods and optimum infrastructure utilization. They can engage with a right technology partner who can understand their needs as well as limitations to provide robust, scalable and secure solutions to them at the right time.